So What Happened to All the People?

In Phoenix, competition among investors has driven home prices up 35 percent, but it’s now sending rents downward.

Judging by investment news, there seems to be every sign that the housing market is heating up. Home prices are drifting upwards, cities like Phoenix are saturated with investors, mortgage-backed securities are back. Blackstone Group LP, the country’s biggest real estate investor–which has already invested $3.5 billion to buy 20,000 single-family homes – has obtained a credit line of $2.1 billion to buy even more. Meanwhile KKR & Co. just raised a $500 million fund for real estate investments. There seems to be no shortage of folks willing to provide money to invest in a housing upturn.

Only one thing is missing here: individual home buyers. Bloomberg’s John Gittelsohn and Prashant Gopal yesterday dove deeper into the housing revival, and found a market driven by big investors competing against each other. Some tellings stats: in Miami last year, institutional investors accounted for 30 percent of home purchases; in Phoenix it was 23 percent.

This latest report helps unravel a paradox of the current housing economy: With all the real estate investment action, you’d expect the number of new mortgage loans to be shooting upwards. No such luck. Look at the chart below, which shows new purchase mortgages through the 3rd quarter of 2012, using data from the Mortgage Bankers Association. For that quarter, buyers took out $129 billion in purchase loans. Not only is that much lower than the numbers from the boom, but it’s less the post-crash levels of 2009. You need to go back to the mid-1990s to get back to numbers like those (and they’re not adjusted for inflation).

In an earlier version of this post, for the TMN newsletter, I suggested that Blackstone has made a sophisticated move here, funding a bet on the long-term value of property by renting in the short term to buyers still locked out of the housing market. Gopal and Gittelsohn’s newest reporting, however, raises some questions about this strategy. Other investors are also crowding into rental housing. The consequence is that, as the story explains, rental prices are falling even as sales prices for the kinds of houses Blackstone wants — three bedrooms, built after 1990 — rise.

The bet on rentals does at least give big institutional investors an out if the housing recovery is not sustained. I suspect that’s a possibility many eager individual investors haven’t really considered. Every bust does reach a trough, but not every market climbs back to its boom-time high. Think of Nasdaq after the tech crash.

Right now we’re in the midst of a sharp decline in the home ownership rate. That might mark a temporary blip, or the beginning of a long period in which it is harder to secure a mortgage. If it’s the second, then players like Blackrock that are focused on properties they can rent at least have a backstop, while smaller investors counting on selling their properties in a big new housing boom will get burned.